The clash of the titans is upon us. Make no mistake – it’s make or break time for the bears as they are running out of time as well as wave sub divisions here. Emotionally everyone has been ripped to pieces, but from a technical perspective things could not be much clearer. Either the bears close the deal right here and now or they will be squashed and again be relegated to watching the bulls take their lunch money and fuck their prom queen.
The financial establishment is fighting for its survival – with tooth and nails – as it has been for the past two years. They have used every trick in the book and some unprecedented ones that hadn’t been written yet. They’ve gotten every break and get out of jail pass one can possibly imagine – but despite having the wind in their backs the upside momentum has stalled for about one year now. But don’t underestimate them for a second – until the fat lady sings the incumbents will continue to do exactly what they have been doing and they will never ever give up.
For their survival depends on it.
We now find ourselves at a major inflection point and the big question that remains now is whether the deflationists or the inflationists will win the war. Robert Prechter and friends insist the Fed can’t possible stem the bursting of the credit bubble through continued quantitative easing initiatives. I used to be convinced of that – but having seen what I have seen for the past two years I’m not so sure anymore. I’m also now mindful of various and concerted currency games which seem to provide almost infinite support and thus a permanent floor to equities.
So perhaps the combined forces of banksters worldwide may somehow get the job done and simply socialize those losses to the rest of us – thus in the process finally destroying what ever remains of our teetering middle class. We shall see – either way we’ll probably see some fireworks before it’s all said and done – and I’m not talking about hypothetical ones.
Whatever we’ll get – I’m dressed for the occasion (yes, I’m almost that handsome – well, almost). Now, that I’ve set the stage for you guys (and have the attention of the girls), let’s look at some charts:
The least important chart today is our wave count. Quite frankly – it’s quite clear at this stage that we are in a downtrend that either resolves itself or may paint a bottom and turn into something else.
Clockwork Orange keeps us locked in that current down channel. Which means we may pop a little on Monday morning but then reverse and paint new lows later in the week.
Soylent Green territory begins after 1070 – if we push much above that we will see many funds throw their weight behind a wonderful short squeeze opportunity. Either bears or the bulls are getting squeezed next week. The bears most likely early in the week and if we push higher quite possibly the bulls. I may however point out that if we don’t turn around at the 1100 mark then we’re talking about something completely different. But we’re not there – so let’s not worry about that yet.
But those are just the current high probability scenarios going out for a week or two – what’s a lot more important here is that the current count does not leave much more room for further sub divisions – at some point this bitch has to drop like a rock. After all this is what should be happening around here. In 2008 we had a similar situation and it was driving everyone nuts. I was telling Berk how the slide was overdue and that it simply wasn’t happening. Then it happened – suddenly – without warning – fast and hard. By the time everyone realized what was happening it was pretty much over.
So, when I say that it needs to happen now then it doesn’t mean that I can’t happen. What I’m saying is that it needs to happen by early October – and by that time it should be almost over. So, that leaves us with a very narrow window for a big slide. It has happened before – and there is no doubt that it can happen. But the important message to take away here is that the whole ‘waiting for Godot game’ we had to put up with will come to an end in early fall.
Now that I have shown you the least important chart let’s look at the most important chart for next week. I posted this one last week while we were hovering around that equilibrium center line of that one year channel I suggested. And sure enough we reversed right at the 25% mark – which coincides with that magic 1040 level the funds have been having fun with for the past few months now. Buying the dip here has been a literal gold mine and like Pavlov’s dogs they will continue to do it until they get their ass spanked in a serious way.
The higher we climb in this chart the less credible the short/medium bearish scenario. At the center point the odds are about 50/50. If we push to 1100 the bears have one last opportunity to squeeze the bulls and turn this market to the downside. At the top line around 1130 the odds for the bulls will have increased significantly compared with the odds around 1140.
We need to clear this channel – one way or the other. If we push above it the bears will be in a world of hurt as the ensuing feedback loop will bring buyers back to the table. I’m not sure that’s what the Fed wants – after all a climb in equities supports rising yields in treasuries. But their game may be something completely different and I’m not putting any of my coin on anyone’s interpretation of the Fed’s game. If we breach 1130 I will anticipate further upside and will trade accordingly. Unless of course my momos scream sell sell sell at me. If that happens – well, I will be here to tell you all about it.
If we finally breach 1040 and then 1020 it will be a starting signal for what Primary {3} – there is very little doubt about that. The majority of the longs will draw their line in the sand right there and should we breach it will most likely head for cover. Maybe politics and the November election make this scenario questionable – at least that’s what some claim. Then again – it happened in 2008, didn’t it? 
The daily Zero has been pretty lackluster as of late. Just compare the magnitude of spikes we saw early in the year with the snooze fest we had to put up with since mid of July. Yes, that may have been merely seasonal, and if that’s true then it gives additional credence to my perspective that September will be the make or break point for the bears. The big boys are returning now and we should see considerable increase in volume and participation.
The last buy signal we got (see dotted line) was pretty weak and it was only good for a moderate bounce. Thus far we did not see a new low accompanied by a major divergence. But then again, we did not see a big spike down either that would signal that bearish momentum was on the rise. So, I’m split here and thus the odds are split in my mind as well.
Copper started to point up last week and – to no surprise – equities followed suit. Note however, how equities have lagged in comparison with similar levels in copper. This suggests that bullish moves in equities are lagging those we see in copper – a bearish indication. Nevertheless, we are also at a pretty important level for copper – which I have tried to highlight via a blue rectangle on the lower panel. But it’s actually a lot more clear on the point and figure chart:
See, isn’t that so much nicer? I love P&Fs for support/resistance lines. And copper just touched the 340 mark which should pose quite some resistance. If it breaks above then the bearish price objective of 296 may have been revised. Maybe some P&F aficionados can chime in here as well. I have the rules somewhere but don’t have the time to dig them up tonight.
The message to take away here is to watch copper like an eagle. A breach higher would be another ace in the sleeves of the bulls.
My gold:silver ratio chart plotted against the SPX also has touched my one year sell line. Usually bearish things happen at this lower diagonal and this time should not be any exception. Again, a breach here may greatly weaken the short to medium term bearish scenario in equities – so I will be keeping an eye on it.
Currencies is really where the game is being played these days. The AUD/JPY has seemingly been set up with a turbo charger running on high explosive mix of nitro, fuel and oxygen. Seems that the BOJ has had it with lagging exports and is putting the squeeze on the Yen longs by buying the Australian Dollar. Maybe some FX traders could shed a bit more light on this for the benefit of us all.
We are close to the breaching the upper line on my stochastic but that doesn’t mean much. We may push above and become embedded after all – so who knows how high this thing may climb. And that is probably the most worrisome chart for the bears – if equities follow suit here then we’ll see 1100 on the SPX in a very short order. But if it lags then it will give the bears additional ammunition for a long squeeze once the AUD/JPY rolls over.
The DXY is clinging to 82.87 – and not seeing the Dollar getting killed is a plus for the bears. After all, the 18 month climb in equities has been greatly fueld by stomping on the Dollar in the process. You may remember the chart I posted last week which showed the SPX valued in Gold.
Bottom Line:
It’s now or at least not for quite a while for the bears. I won’t say never of course. But the wave count does not give us too many wiggles to postpone the grand finale here. If this is a Minor 3 of Intermediate (1) then it needs to start showing its colors. And the A/D ratio of 5.0+ we saw on Friday should be an anomaly that cannot be followed up – otherwise we have to concede that something else is going on. That simple.
Public Service Announcement:
In the past month I have again put additional emphasis on refining some of my automated trading strategies, with quite some success if I may say. A major reason for my revived focus is a growing realization that the retail trader is slowly going the way of the dodo. I love you guys but just don’t think there will be many of you left in one or two years from now. The market simply has become to complex, narrow, and brutal. And as the old saying goes:
If you can’t beat them – join them.
Now, I have been blessed with some pretty considerable programming experience – after all I used to be a software engineer for 15 years until I decided to retire and focus exclusively on my trading. That however doesn’t mean that I stopped hacking code – quite on the contrary: I merely had become tired of working on other people’s projects and quickly found that my skills were a lot better used working on trading strategies. I seem to have a knack for seeing patterns and putting my observations into code and thus working strategies is a very rewarding endeavor for me – mentally as well as monetary.
Incidentally, the strategies I am testing and continue to optimize until I am ready all have been back tested starting January 2007 to the present. The reason for that is that I believe that any strategy which was able to survive the past four years should at least have a fighting chance moving forward. After all, we are talking about some very dynamic and contrasting market conditions here.
There will be several announcements in the next few weeks – and I believe you will appreciate the kind of stuff I have been cooking up. And over the next few months you may see a slow shift towards automated trading. Some of it in the same fashion as Geronimo or evil.rat – which means via email or SMS notifications. But I may also finally hook into Collective2 or a similar service and thus give you guys the opportunity to trade various strategies through an automated framework.
What concerns me a bit is that Collective2 takes a big chunk out of my profits and being the greedy market megalomaniac that I am it would be preferable to find a different solution. So, if you are reading this and know of a better framework please let me know – I’m open to anything as long as it represents a viable and secure solution.
See you on the other side, folks.
Cheers,
Mole
Until yesterday night I anticipated this to be a long winded and torturous weekend forecast with much conflicting evidence and various exhibits depicting the pros and cons of the current bearish scenarios. Fortunately, I saw the light and although I am going to present a boat load of charts as well as some short term bullish evidence my position at this point is: Don’t sweat the details. For what’s coming may transpire tomorrow, next week, or a month from now – but it’s coming and either you’re positioned for it or you’re not.
It’s really that simple – forget about the short term – on a medium term basis the bulls are about to get hit by a folding chair WWF smack down style . Obviously, this has implications on how we deal with whatever transpires next week. After presenting what I deem to be some compelling evidence I offer some strategies that should keep us out of trouble plus leverage any sudden moves to the max.
In that context I greatly recommend that you carefully study my Friday update on EWP Option Strategies, if you have not done so already. Please make sure you fully understand the basic premise behind the Bull Put Ladder (a bearish option strategy) in particular and also it’s cousin the Bear Call Ladder (bullish as suspected) – although I reckon that we won’t be needing the latter for quite a while. It is key that you develop a taste or at least an understanding of these strategies as they will be key in grasping some of the trades we’ll be looking at in the near term future.
Alright, plenty of charts waiting – prepare your browser for a regular chartalanche:
Long Term View
Let’s start with our long term chart roll call first – after all I told you to not sweat the details and of course there is method to my bearish madness:
I am pretty confident you by now understand what the SPXA50 chart is – if not I recommend you read up on my recent discussion of average vs. median, which is another topic you should be firm on at this point. What we are doing here is to put the SPXA50 in context with volatility as expressed by Mr. VIX. And then we slapped a CCI on the entire frankenchart. Why? Because we can! Plus it seems to nail roll overs quite nicely. And rolling over it did just when we expected it to happen – that breach of the 100 mark worked like a charm. As you can see there is plenty of downside momentum remaining.
Same chart – except that we’re zooming out to see the last four years and are also using a MACD it on it. Which seems to move quite cleanly – always appreciated. And as you can see it just rolled over from quite severly overbought conditions – which without much of a price move. Again, plenty of downside momentum remaining.
Here we are applying the same rationale – in this case we are looking at NYSE stocks above 50-day SMA in the context of declining volume. Basically we are measuring how much those market makers are lying to us – the higher the spike the thinner the volume driving those market leaders up as rising down volume increases the divider. I know it’s a mind bender – just trust the chart as it seems to be pretty spot on – at least on a long term basis.
Having fun yet? Well, we’re just getting warmed up. This is the SPXA50 chart on its own and again we’re using that CCI as a measure of momentum. Again, I have no particular reason for having picked that one, except for that it seems to work pretty well. Last week I showed this chart and proposed that there was a lack of progress despite prices melting higher. Well, it seems that this divergence played out as expected – thus far at least. Again, plenty of downside potential remaining – long term.
The SPXA50R is the same as the SPXA50 – only difference is that it measures the percent of stocks above the 50-day SMA instead of the number. I posted this chart a few months ago as it depicted distribution as we were painting new highs for the year in equities. Quite interestingly the 84 SMA has not even budged, which speaks to the continuatin of the current downtrend.
And here we go even more long term – we are using a moving average of the SPXA200R (yes, you guessed right – stocks above their 200-day SMA). I have highlighted each time we painted ~1120 on the SPX and as you can see we are at around 60% of what we saw at prior readings. Which means distribution – which means weak hands getting frustrated and kicked to the curb – which means many of you stainless steel rats.
The proof is always in the volume – and the NYSE advancing/declining volume ratio chart again pointed the way as advancing volume began to lag downside volume after that first spike up in early July. Again, much downside remaining here.
This chart is the product of a collaboration with Tooncez and myself – I mentioned that I wanted to see a MACD style histogram showing the delta between the SPX and the SPX:VIX ratio and he sent me an early version which has been going through a few iterations since. RaisedByWolves also joined the fun and suggested to use a log on the ratio in order to bring it in line with our stockcharts predecessor.
Anyway, I think that chart is absolutely beautifully stunning. No other chart I have seen depicts the trend of the past two years as nicely as this one. Good to see red readings in the histogram and we definitely want to keep it this way. It’s now time for those readings to intensify to the downside again as we are too close to the zero mark for bearish comfort.
One more long term chart before we look at the more immediate trend. The McClellan measures the medium term and the NYSE Bullish percent the long term. Each of them is calculated completely differently but we just choose to not care and look at it as a ratio chart. Which rolled over just when we thought it would – fantabulous! Again, there is still plenty of downside momentum remaining – especially if we bounce up a little in the short term.
Which brings me to the short and medium term charts:
Short/Medium Term View
The long term remains quite clear and unless all those charts are wrong down we go. Short term however the tape will throw us a few monkey wrenches and it may be as soon as early next week:
First up, the Dollar seems to be in the process of completing a first motive to the upside (clearer on my 135min chart). Which means we probably will get some profit taking either here or a handle or so higher which will favor equities. If you have any doubts about that please remember that the entire melt up from the March 2009 lows was due to massive quantitative easing and thus the destruction of the Dollar. Let me show you how much your buying power measured in Gold has been degraded:
That’s right – relative to gold your fancy stock portfolio is still worth jack and we are near the 2009 lows. You can thank government (i.e. Fed) sponsored Dollar dstruction for that. Anyway, that’s a story for another day – let’s move on with our short term perspective.
My NYSE A/D ratio chart and in particular the D/A signal seems to be running a bit out of steam. Unless we get a strong spike to the upside on the bottom panel we may be completing a bullish Gothic Church Tower (GCT) fractal, which seems to be a harbinger of green candles ahead. How many and how long is unclear – if this is a GCT it appears to be a mild one, so the expectation is that we remain below this month’s highs.
The daily Zero also spiked down and then went flat for two sessions despite the SPX painting new lows for the month. Which also may mean that green candles loom ahead. The spike down was not super strong, but it is strong enough to qualify.
FYI – that smoothed panel has been puzzling me all last week. Either it’s right and we indeed whipsaw around a bit more, driving the bears crazy, or there’s something wrong with that reading. I’m not sure yet and as of now I recommend you simply ignore it, as it’s a fairly new version of the Zero. In case you read this after it becomes available to no-subs – the Zero is a proprietary trend indicator (there’s also an hourly and a 5-min intra-day version) and you can sign up for it here.
This is the short term version of the SPX:VIX chart I presented above in the long term section. Note that I am not using a log on the ratio – if I do this on the hourly it just doesn’t work. Which is something we’ll have to continue looking at. For now a simple SMA suffices IMNSHO.
But what I’m seeing right now argues against an immediate drop to the downside. Of course all that can change come Monday morning but thus far the downside plunge late last week was not accompanied by a strong negative reading. Could be that we simply need a bit more time and that we may get another push up before a big push down.
Mr. VIX is also creeping along that upper 2.0 Bollinger. If the bears are lucky it stays inside – if not we may see a close outside which would be one step toward an equities buy signal.
Wave Count
Based on all the above I am long term bearish but short/medium term bullish, right now. However, knowing that the long term trend can overwhelm any time I would not recommend going long here. Instead some mild hedging and in particular a ’sell-the-rip’ strategy is what I personally plan to employ.
The Blue Plate Special has the lower probability right now, despite the fact that most bearish pundits seem to be in love with it. I expect a pretty scary retracement should the bulls finally gain some ground and the dip buyers decide to pour in. But we never really know for sure – and relying on ‘just one more rip’ will in the end lead to missing the bus. Thus, I plan on holding my bearish positions and even add more starting at 1100.
Soylent Green has a bifurcation – one suggesting a drop at 1105 and then one at 1122. I think both are reasonable targets and it all depends on how much energy the bulls are able to mount. This right now still is my preferred scenario, mainly due to the short term charts I posted. But I’ve been around long enough to realize that those charts may be fooling me, thus I refuse to over complicate matters by trying to play every swing. If we get a run up then I’ll add more short positions as soon as I see momentum roll over.
Suggested Strategy:
Wasn’t that fun? Exciting times indeed and extremely interesting from a technical perspective. Now based on what we learned on Friday I propose an alternative strategy of playing a possible swing up. If we do get to 1105 on the SPX, which roughly equals 110 on the Spiders – how about a S110P/L108P/L106P bull put ladder? I’m sure BobbyLow will have a field day with this and I’m open to various suggestions – as a matter of fact, that would be your homework assignment for this evening. I would love to see some TOS simulations and profit/loss as well as break/even analysis – as a matter of fact the winner gets a free week of Zero goodness.
Cheers!
Mole
Some of you over eager grizzlies might have become a bit frustrated with all the whipsaw. I do see renewed signs of frustration in the comment stream and although I can surely empathize I must point out that I have been insisting to play this thing on a long term basis. Some of you have been waiting for something along the lines of Primary {3} for almost a year now and the writing is finally on the wall as the trend has clearly changed to the downside. Heck, even Goldman purportedly got burned trying to short the market prematurely – how’s that for sweet irony?
Bears have to learn to be patient – timing is everything, especially when trying to trade the tape to the downside. But if you know where to look you may actually get excited as the short term bearish case has strengthened greatly since Monday morning.
The first thing that stood out when I checked my SPX chart this morning is that this morning’s drop bestowed us with a beautiful motive wave – it’s almost textbook. The Zero readings accompanying yesterday’s and today’s tape are also very flat – which pointed toward a short term bounce. And that again may just be a small second wave as Minor 3 in our Clockwork Orange scenario keeps sub-dividing – which is another expression of a wind up in momentum that would release quite strongly to the downside.
Of course Soylents Green and Blue are not out of the picture by far – after all the time cycle charts I am looking at keep insisting that it’s simply not time just yet (see cartoon above). Frankly – I have more time (theta) than I’ll need to catch the big wave down and I am already mentally prepared to sit out another spike up. However, if it comes now I will be the last person to complain
That fractal on the NYSE A/D ratio is almost eery in its similarity. Based on this pattern we should push up a little bit and then drop hard for the remainder of the week. Not what I’m saying will happen necessarily – but what this fractal claims will happen. To be clear – Soylent Blue would interrupt this fractal but so far it’s quite exciting to watch.
I’m seeing a similar situation on the daily Zero – for your convenience I have used color arrows to point ou the steps in the repeating pattern. And again the pattern points toward a massive slide looming ahead.
Maybe this is all just coincidential and the pattern breaks here – meaning that the fractal does not ecompass the big move down. But again, one can’t help but wonder if this pattern may play out sometime this week.
Bottom Line
I still must caution everyone to be accumulate too much short term negative delta. If you lean bearish make sure you sit on sufficient theta to ride this thing out. Yes, I keep repeating this mantra, however based on the comments I’m seeing it seems that is one many of you guys seem to be catching on to, which is encouraging. Short term we probably push up a bit further – that’s what makes the most sense for all scenarios I am proposing above.
Another reason why I am still cautious (at least short term) is that the pattern right now looks like a textbook pre-3rd wave release chart – and my Spidey sense keeps warning me that it probably won’t be that easy. Always remember that most of the cards are usually stacked against the bears – sudden plunges happen rarely and only when you least expect them. Trade accordingly.
1:40pm EDT: A quick update inspired by a new face named ‘elliott_surfs’ who complains about the stomping his long term puts took since he got them around 1088:
See, the game is all about perception – n’est-ce-pas? Watching your long term puts melt away despite the trend moving in your favor is typical of the type of machinations you should expect ahead of big moves to the downside. Case in point the chart above. Where was the SPX trading around May 21st? Around 1055 – and yes, it snapped back quite quickly. Nevertheless the ‘risk’ put sellers and call writers assumed at that moment drove the VIX to 48. Where is the SPX trading exactly two months later? 1073 – just a few handles higher after having traded in the same 1055 cluster this morning.
But look at the VIX now – it’s around 24 – 50% less! Now, I concede that the drop from the top back in May was violent and all – understandably you would expect risk assumption to be a bit higher. But double of what it is now?
If you wince every time you look at your put premiums then understand that this is exactly the type of reaction market makers want you to have. It’s all part of the big game aptly called ’shaking out the weak hands’.
The good news is that put options are as cheap as they were two months ago
Trade accordingly.
Cheers,
Mole
I don’t want to put too much emphasis on a pre-holiday session but today’s tape left us with some evidence of a possible bounce. Let’s start by taking a look at the TRAN fractal I posted a few days ago as a map of what ’should be happening’.
This excerpt taken from the ‘Book Of The Dead Market’ shows us on the brink of a market about to fall off the plate. I am sure that back in 1987 the tape was pretty oversold as well and that many momentum indicators available at the time were pointing towards a correction. However, Mrs. Market was not in the mood and decided to continue downward in post haste. It was almost impossible to predict back then and it is equally impossible today.
Why would the fractal break right here where it matters the most? Who knows – because Mrs. Market is a cruel and sadistic bitch? Or maybe Stainless Steel Hamster didn’t remember the password – or even worse – faked it?
Thanks a lot Hamster Boy! Next time – remember – Klaatu Barada Nikto!
Problem is of course – having a road map can be very helpful, but it can also be dangerous if you’re looking for a road in the wrong county. In any case – a significant deviation from our current road map will tell us that we need to accommodate a correction of some sort. Of course what brings all this up in the first place is that today’s daily candle looked and smelled like a reversal and didn’t exactly fit into the picture. But it’s not just the candle – it’s also where it happened. Let me show you what I mean:
Basic stuff – simple 2.0 Bollinger on the SPX. We breached the lower line and bounced right back. Now in some way this is of course a bullish signal but then it’s also a long term bearish signal. I know that sounds nuts – but would you rather see us close outside once or twice during a holiday weekend and then have to worry about a monster snapback relief rally?
Same story on the VIX – as you can see we touched that upper boundary and snapped back. Yes, that’s bullish for equities in the short term but medium term it also allows the current upper line to stabilize and possibly push higher. What we want is for Mr. VIX to remain inside and to continue upward – if you are put holder that is of course. What we don’t want is a close deep outside and to possibly face an equities buy signal that leads to a massive reversal and more theta burn for the bears.
A bounce here would actually be quite helpful. My NYSE Adv/Decl Volume chart is pretty shot to hell right now. As a matter of fact it hasn’t been that low since the March 2008 low. I can imagine that this may freak you out – and does it for me – which is why my diagnosis is as follows:
Based on the fractal above and the situation we are now facing I believe that we need to proceed downward almost immediately. Since tomorrow is a pre-holiday trading day I am wiling to give this thing until Tuesday (NYSE is closed on Monday), but if there is any significant sign of strength tomorrow or Tuesday then we probably have to sit through a counter rally of yet unknown degree. My best guesses based on my fibs and the wave rules are threesome:
Clockwork Orange: Down down down – Minor 3 of Intermediate (1) will get us below 1000 on the SPX and then some. Again, this has to happen rather fast as we are running out of time before buying interest will step in with strength.
Soylent Blue (and it’s slightly more bullish clone): We either are painting a Minuette (ii) or today was the low of Minute {i} which would be followed by Minute {ii}. The latter is the more bullish scenario – the former is basically a more pronounced sub-division. Pretty much academic as all of them point lower.
There is also miscellaneous evidence in form of the Dollar (DXY) which is pushing down, a Euro (AUD/JPY and EUR/JPY) which is pushing up (although equities have been lagging thus far), Gold which was dropping hard today, etc.. All that can be overwhelmed by a good old fashioned banana slip as evidenced by the 1987 fractal – but the prior example shows that there was not much lingering around. Neither should that be the case this time, otherwise the fractal either breaks or at minimum we need to consider a slightly modified scenario. Which would be reasonable – as one can’t expect a fractal pattern to be accurate down to the last candle. Nevertheless, Clockwork Orange does not have a week or more to sort itself out – it needs to happen soon – and by that I mean next Tuesday or Wednesday at the very latest.
In anticipation of a short session for everyone I would like to take this opportunity to wish all of you intrepid stainless steel rats a most excellent and relaxing Independence Day. I only wish our country would be in so much better shape – but maybe the looming depression will be an opportunity for all of us to put our iPhones and Crackberries down, pull together as a people, throw out all the bums, and to again revert our great nation back to the place I decided to immigrate to twenty years ago. A lot has changed since then and unfortunately very little has been for the better – our civil rights have been significantly curtailed and our economic future squandered by short term thinking and rampant corruption in the private and public sector. Much effort will be needed to once again return our nation to the values it once stood, fought, and sacrificed so much for. Start locally – talk to your neighbors – educate them – and help each other to prepare for what’s coming. Hot dogs and red/white/blue flags do not represent the spirit of what our nation stands for – it’s up to us – every single individual to make this nation a better place. Remember the enormous sacrifice the founders of this country had to bear in order to escape tyranny – and then try to live up to it. Our motto and message to Washington should again be the one we started with:
No taxation without representation!
Cheers,
Mole
I’m a bit pressed for time on this beautiful Sunday as I am preparing for a short business trip early next week. So, since many of you know the drill and are somewhat familiar with some of the themes I post here over the weekends I will dispense with any long winded explanations and just present the evidence I am able to produce. I think many of the charts are pretty much self explanatory – where they are not I am happy to throw in my point of view.
Boy, where ever that is – those guys sure know how to par-taaaay!! 
I will mostly focus on the long term this time around – and how the short term may support the overall long term trend, which in my view continues to be to the downside.
Long Term Momentum
I started to post this exotic ratio recently. The first version suggests that there may be more upside until we start touching that tan channel line. What I’m trying to say here is that the true test of Primary {3} will be whether or not we are going to make new price highs after we made a signal high.
My second version is a bit more simplistic and suggests that a touch of the upper trend line should result in more downside.What I find interesting is how much upside progress we have made on the signal line, which is really not reflected in price advance on the SPX.
A recent addition to the evil lair, my rendition of the percentage of stocks above their 50 SMA has been making the rounds on the blogosphere lately. This is my original version which mostly focuses on the long term. And on that basis the line continues to point down.
As I’m not one to get complacent after making a discovery, here’s a more short term version (i.e. 13d SMA). Which shows interesting divergences on its own, but it suggests that if we happen to make new price highs this year (hey, don’t under estimate the bulls’ ability to drive this thing up) then we would have to continue to see a lower reading on this chart to support to the Primary {3} outlook. Otherwise something else is in the works. Well, this is mostly mental masturbation for now, but keep an eye on this one.
There was quite some talk about the record TRIN reading on June 4th – some of the pundits insist that the coin side of such a high reading is that they usually first result in some upside before they turn into downside. So, you can actually use them as a warning shot that a drop is looming in the medium term future. A turn may be weeks away – or months like in 2007 – but admittedly those were different times. I agree with this on a short to medium term basis, but I don’t think we are talking months.
Perhaps my 2nd version of this chart can offer more clarity. It took me quite a while to properly interpret the signal here but I think I may be on the right track. What I’m seeing here is that the recent spike was part of slowly increasing bearish sentiment during Primary {1}. You can clearly see where the bulls got squeezed all the way towards the end of 2008.
Then we got a breach of that red line and buyers simply kept buying. This officially initiated the new up trend, which we have labeled Primary {2}. And then the tables were reversed – again clearly visible is the line where the bears were now getting squeezed every time until April.
Then again we saw a breach of that squeeze line, followed by a monster ramp up (accompanied by lower prices on the SPX). This may be the starting signal of a trend change. Well, if this turns out to be confirmed later this year then it is supporting evidence that simply reading momentum signals without context can be misleading and may lead to losses. My money is on the second chart – it is also difficult for me rationalize how a 175 handle drop on the SPX can equal a 900+ handle drop.
This is a slightly different version of my CPCE Deluxe chart. Question I’m wrestling with is whether or not we are going to the upper red line first or are now starting to reverse back down the blue green one. During a trend change situation we may indeed do the former and that would then followed by a rally into Intermediate (2). Frankly, Im not sure yet…
My adv/decl NYSE volume chart painted a serious spike which I have not seen since early last year just before we embarked on Primary {2}. So, it’s justifyable to ponder whether or not we are so oversold at this point that we’ll see another rally hurlding us toward new price highs? Quite honestly, I’m not sure how to read this one – is this a bearish signal or is it implicitly bullish?
JUNK vs. SAFETY
This chart was brought to me by one intrepid SSR whose name I unfortunately forgot (sorry!). What I find interesting here is the little dip down here on Friday.
Which is supported by my own JNK:TLT chart. But what’s also quite interesting was the divergence at this year’s SPX low. Let’s keep an eye on this stuff, shall we?
I would have liked to post my BAA-TYX spread here as well but my usual sources won’t have an update on the BAA for me until Monday. However, Hochberg mentioned that very spread in his STU and it appears that it is at minimum remaining above the 2% mark. I have it at 2.05 on last Wednesday and since then treasury yields have slightly pushed higher from 4.09 to 4.14 on Friday. If the BAA pushed above 6.19 then we would remain at our recent spread high of 2.05. Hochberg’s chart seems to indicate that but I prefer to collect my own data.
Commodities/Metals
My cooper futures chart is pointing up – so I expect there to be more upside until I see some divergence at minimum.
Well, this is really not so much about the metals as it is about the SPX. We actually turned almost precisely at that green upper trend line produced by the gold:silver ratio. Question now is – will the bears have to wait all the way back to the red one?
Medium Term
Mr. VIX finally made it through the center line of its 2.0 BB. I think it’ll probably manage to stay below for a little bit – perhaps we even see a VIX sell signal – wouldn’t that be sweet?
Wave Count
Soylent Green needs to start turning almost immediately – I give it a few more handles to the upside but it we push much past 1095 chances for Orange are starting to increase rapidly. If we push over 1105.67 (by the penny exactly) on the SPX then we are talking a whole new ball game which is Soylent Orange. And that may reverse all the way to 1130 or perhaps even into 1150/1175. No, it’s not impossible for this to happen – despite weaking Zero signal and diminishing volume readings in the futures and in the cash indexes. Let’s never forget that the bulls have a lot of help out there – drops are always considered to be negative which is why they are being fought every step on the way.
Bottom Line
None of the above tells me that we are about to drop right away and I’m 50/50 on Green vs. Orange. Reason being is that we are actually less oversold now then we were a few days ago – yes, you read that right. These massive drops usually happen in very oversold tape and the conditions were ripe early last week, but the bears squandered it. Now we have painted a double bottom and I would be surprised if we turned right away – I am willing to consider it as my wave counts offers me that possibility. But I am not ‘feeling it’ – if that makes any sense. It’s also possible that we stay inside of Soylent Green and spend a week or two painting some double zig-zag – who knows – these things are hard to predict.
The Dollar is also close to painting a multi-week or multi-month correction and that would favor equities as the Euro would gain some much needed strength. Everyone is hating the Euro right now – which is probably why it will snap back at some point.
Long term this market appears to be in the early stages of a primary degree correction. I am fairly confident that I am interpreting the tea leafs properly on that end as there is much supporting evidence. Which is why I am going to hold my long term puts into any counter rally – I have not changed my stance on that and probably won’t until the market tells me that I am wrong.
Public Service Announcement
I will embark on a brief business trip on Wednesday [updated - I will not be gone Tuesday], so I will be pretty quiet on that day (will post comment cleaners if we are getting to Sparta). If possible I will offer a quick update in the evening but I can’t promise that. Expect me to be back in full force on Thursday after the bell.
Cheers,
Mole
I’m a big admirer of Chris Carolan who runs a pretty purist site for serious market analysts over at carolan.org. Chris is also the author of a book titled ‘The Spiral Calendar’ – unfortunately it’s out of print as it’s some of the best work on time cycles I have come across. I’m sure some you long term readers probably recognize his name as I’ve mentioned his spiral calendar time cycles in passing on several occasions and there is even a category dedicated to this. Despite the long track record and quality of his work Chris remains largely unknown among market participants, and it is my goal to change that.
Chris is not as prolific as yours truly but he has been quite spot on when it comes to Gold. Thus I have asked him to post here on that very subject for the benefit of my own subs – in return he hopefully gets some much needed promotion (unlike Chris I’m shameless and don’t mind pimping the heck out of a good call).
Some of the stuff he’ll post comes without much explanation, and this is where his and my style differ by quite a bit. His time cycle work is quite complex and is the product of several decades of research and observation. I suggest you simply take it for what it is and then see if it pans out the way as suggested. FWIW – I have many analysts try their luck at predicting gold and most have failed. Chris is among the few I respect and I would not let him post here on a whim – I have followed him for several years now. I am very proud that he has agreed to post on Evil Speculator and I hope you will enjoy the occasional gold post he agreed to put up here.
With that little intro, let me hand things over to Chris:
Chris Carolan’s Gold commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.
ECRI WLI:
BDI:
CRB
Airstrike on Iran:
California default before Dec 2010:
